Funding for Lending plan could benefit first-time buyers

Lorna Bourke considers the impact of government emergency lending plans on the mortgage market.

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What effect will the government's £80 billion Funding for Lending (FFL) plan to provide cheap funds for mortgages and small business loans have on the mortgage market?

The general consensus seems to be that the scheme, which was launched on 1 August and will run for 18 months, will help keep mortgage rates at affordable levels as the cost of mortgage funding in the money markets rises, and make more mortgage funds available. But it won’t necessarily make lenders any less risk averse or mean that there are more 95% loans available to first-time buyers and others with a small deposit.

‘It might make mortgages cheaper – but it won’t necessarily make higher loans to value (LTV) more available,’ said Bernard Clarke of the Council for Mortgage Lenders. This is bad news for first-time buyers who, crucially, underpin the housing market.

It is much too soon to write off FFL, but the critics are already out in force. ‘Industry experts and consumers alike will have been hoping to see the first-time buyer market rejuvenated by the Bank of England's Funding for Lending scheme, but current evidence suggests that those in the 90%-plus LTV bracket are not the ones getting the best value from the recent rate cuts,’ said Sylvia Waycot of Moneyfacts, which monitors mortgage products.

Benefits will filter through

Ray Boulger of mortgage broker John Charcol is more optimistic. He believes that by making more cheap funding for mortgages available overall, eventually some lenders will prefer to lend at better margins to 90% LTV borrowers because the 60% LTV market will become saturated and less profitable.

With HSBC (which has said it will not use FFL) offering loans up to 60% at 2.99% fixed for five years there can’t be many homebuyers left wanting low LTVs who haven’t taken advantage of these cheap offers. ‘I think it will help the 90% LTV market if not the availability of 95% loans. I don’t think lenders have much appetite for 95% mortgages,’ Boulger said.

David Hollingworth at London & Country Mortgages agrees, pointing out that where this extra lending is targeted is crucial. ‘Lenders could attack the remortgage market in an effort to harvest prime low LTV customers from rivals. However, that could prove a very competitive place to be with others taking the same approach.’

But the effects could filter through to those wanting 90% loans, he said. ‘Last year when pricing competition heated up at the lower LTV end of the market, it did ultimately lead to improvements at higher LTVs. The end result could be a ripple effect of rate improvements through to higher LTV borrowers.’

Some lenders have already said that they will use cheap FFL funding to target first-time-buyer mortgages. For example, for those who have a 10% deposit, RBS has just launched a fee-free 4.79% five-year fixed rate for first-time buyers.

Markets stagnating

For those looking to buy or sell a property, anything that frees up the stagnant housing market must be a good thing. Mortgage approvals and lending slumped in June to their lowest level in 18 months. Bank of England figures showed that mortgage approvals fell to 44,192 in June, down from 50,544 in May and the lowest level since December 2010. Prior to the credit crunch in 2008 mortgage approvals were running at around 90,000 a month, double today’s rate.

Cheap money will be made available to all lenders, including small banks and building societies, to ensure that no lender is at a competitive disadvantage. The Bank of England said that lenders should be able to ‘fund new lending at a cost of roughly Bank rate plus 0.25% (0.75%) – much lower than current market term funding rates, even for the strongest banks’.

Good news on interest rates

Boulger said ‘most lenders will use this cheap money because there are no onerous conditions attached’. And there is good news for homebuyers worried about interest rate rises and the effect on existing variable rate and tracker loans. Lenders will have to refinance this cheap borrowing in the wholesale money markets five years down the line.

Boulger says this indicates that ‘the Bank expects the banking system to remain under pressure for most, if not all, of that period, with the implication that bank rate is likely to stay at 0.5% for most of this period. Clearly the hope is that it will be possible to refinance this cheap borrowing in the wholesale market in five years’ time.’

What is needed to assist FTBs is a massive reduction in house prices! This would happen if a Rent Act was introduced or if the Treasury imposed greater taxation on landlords. However house prices are only likely to fall if we have a major recession. I would prefer it, if the Goverment took up my one or more of my initial suggestions but I will probably have to wait for a major recession which will hopefully happen when the Euro breaks up!

Does anyone understand why GW Pharmacuticals share price is constantly falling? Set against this they ar continually gaining extra regulatory approvals and I have yet to read an @expert' report recommending anything less than hold.